Options Update: Call Volume Soars on The Boeing Company

The Boeing Company
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was broadsided with another bearish brokerage note this morning, marking the second straight session of negative news from the analyst community.

Yesterday, Societe Generale initiated coverage on BA with a “sell” rating following yet another delay in the company’s much anticipated 787 Dreamliner. This morning, Deutsche Bank cut its price target on the shares to $39 from $48. The brokerage firm also reiterated a “hold” rating on the equity.

There is room for the situation to deteriorate further on Wall Street, as 8 of the 17 analysts following BA rate the shares a “buy” or better, according to Zacks.com. Meanwhile, Thomson Financial reports that the stock’s average 12-month price target rests at $57.11 per share – a 47% premium to the stock’s Monday close at $38.74.

Growing Investor Optimism

With such a string of negative headlines, I would have expected more pessimism among options traders. However, the speculative group continues to bet on a rebound for BA, as its Schaeffer’s put/call open interest ratio (SOIR) of 0.56 ranks below 78% of all those taken during the past year. This reading indicates that options traders have been more bullish toward the shares only 22% of the time in the prior 52 weeks.

Meanwhile, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) reveals that optimism is growing toward BA. The stock’s 10-day ISE/CBOE call/put ratio arrives at 2.22, meaning that calls bought to open have outpaced puts purchased by more than 2 to 1 during the prior 2 weeks. This ratio is also higher than 84% of all those taken during the past 52 weeks, underscoring the extremely bullish nature of this activity.

This trend has continued in today’s trading, with BA call volume nearly quintupling the stock’s daily average. Turning to our Intraday Volume Explosion List, I noticed that the most active contract was the January 2009 45 strike, which has seen more than 10,000 calls change hands so far today.

Boeing option volume details

The Anatomy of a Potash Call Position

Digging into this call activity, I noticed that a block of 6,000 contracts changed hands at 10:34 a.m. Eastern time at the ask price of $0.95. The total outlay for this position would be $570,000 — ($0.95 * 100)*6,000 = $570,000. For this trade to reach breakeven, BA would need to rally about 18.6% to $45.95 per share from yesterday’s close at $38.74 before the options expire on January 16, 2009. The maximum loss on this position is limited to the initial investment of $570,000.

By entering this trade, the investor is indicating that he expects BA to rally sharply during the next several weeks. The equity has started off on the right foot today, rallying roughly 2.6%. But will today’s bullish bias be enough to push the shares through overhead resistance? Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

With the equity down more than 55% so far this year, a call position on BA seems an unlikely candidate for a profitable trade. The majority of the stock’s losses have occurred since late last year, as the shares have plunged more than 62% since setting a near-term peak of $107.15 on October 5, 2007. During this time frame, POT has battled resistance at its 10-week and 20-week moving averages – trendlines BA has closed above only a handful of weeks during this time frame. Today, the security is attempting to break through short-term resistance at the 40 level, but short-term resistance at its 10-day and 20-day moving averages are creating trouble once again, and could potentially put a damper on returns for January 2009 45 call position.

Weekly chart of Boeing since October 2008 with 10-week and 20-week moving average

The Sentiment Drivers

With options traders growing more bullish, and the brokerage community beginning to abandon ship, let’s take a closer look at where the short-selling community stands on BA. During the most recent reporting period, the number of BA shares sold short rose by 11.27% to roughly 12.7 million shares. Despite this increase, short interest amounts to a paltry 1.74% of the stock’s total float. Should this shorting trend continue on BA, we could see added selling pressure send the stock on yet another downleg.

Sentiment indicators for Boeing

The Verdict?

Given the stock’s long-term downtrend, overhead technical resistance, and unwinding bullish investor sentiment, a January 2009 45 call looks like a poor investment choice at the moment. Granted, we don’t know all of the information regarding today’s example – i.e. the trader could own BA shares, or have issued the call options as part of a larger position such as a credit spread. That said, a simple buy-to-open position at the January 2009 45 call looks very unappealing from a contrarian perspective. In fact, I would be more likely to consider a January 2009 45 put given the potential for continued losses from BA shares.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.